As 2016 New Year’s resolutions went, few matched the enthusiasm, ambition and fragility of the commitment made by the Association of Southeast Asian Nations (ASEAN). On January 1st, its 10 member countries – Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam – inaugurated the ASEAN Economic Community, a common market whose goal is to forge a prominent regional bloc to rival China and Japan, and bring economic well-being to its 625 million citizens.

Some 13 years in the making, the Community promises an increasingly free flow of services, investment, skilled labor and capital to a market that is now larger in terms of population than either North America or the European Union. Such a single market, its creators envision, will increase intra-ASEAN trade and justify greater spending on infrastructure. Currently, the six leading nations in the group (Indonesia, Malaysia, Thailand, Singapore, the Philippines and Vietnam, a.k.a., ASEAN-6) allocate an average of 26 percent of their GDP to investment, which any recent visitor to Manila or Jakarta might argue is nowhere nearly enough.

Where one stands on ASEAN integration depends, of course, on where one sits. On a recent visit to the Philippines, we posed the question to various people, including government and central bank officials, and bankers whose businesses will be impacted by the Community.

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Plowing rice paddies, Lala, Mindanao.

‘Sweet Spot’

As 2016 neared, the Philippines government expressed confidence that the nation was ready for integration. The country’s 6.3 percent growth rate, the highest five-year average in the last four decades, puts the nation in a “sweet spot,” said Department of Trade & Industry Secretary Gregory Domingo. Citing projections from HSBC and Goldman Sachs, Domingo predicted the Philippines would be the fifth-largest economy in Asia by mid-century, and the 14th largest in the world. He added, however, that prioritizing micro, small and medium enterprises (MSMEs) in the regional trade agenda was critical; Philippine MSMEs comprise 98 percent of all registered GDP.

The Philippines’ central bank, Bangko Sentral ng Pilipinas (BSP), was less sanguine. Under the ASEAN Banking Integration Framework, qualified ASEAN banks will be allowed to establish operations throughout the Community. Greater competition is a given. Regional integration would, for example, drop BDO Unibank, the Philippines’ largest bank as measured by assets, to the 19th spot in ASEAN. To help prepare banks to compete in a regional system, the BSP is adopting higher capital requirements, enhancing credit-risk management rules and raising governance standards, among other actions.

“It is imperative that you define and carve out your comparative advantage in our local market,” advised BSP governor Amando Tetangco in a speech to Philippine bankers just before the January 1 deadline. In case the message wasn’t clear, he added, “If you have not done so, you will need to make those tough decisions now to give yourselves time to execute your strategic goals.”


Time, fortunately, appears to be on bankers’ side. Integration will be delayed, if not confounded, by an approach among ASEAN members that favors consensus-based decision-making and a policy of non-interference in the internal affairs of others – the “ASEAN way,” as it has come to be known. An absence of penalties for noncompliance and the lack of a powerful central bureaucracy add to the challenge.

Nicolas ‘Sonny’ Lim, President and CEO of 1st Valley Bank.

Unlike the EU, ASEAN has no plans for a common currency, and cross-border travel is still limited. Trade liberalization is the only aspect of the Community’s vision that shows any significant progress. Nearly all of the items the top six countries have agreed to put on the “inclusion list” are free of tariffs. Nevertheless, countries such as Indonesia and the Philippines have held back many important agricultural and food-related products from that list, citing a food security rationale. Development gaps and infrastructure differences between and among ASEAN-6 and the less developed ASEAN-4 nations present added obstacles. ASEAN financial integration, the Financial Times pronounced recently, is “embryonic.”

Nicolas ‘Sonny’ Lim did not exactly exude enthusiasm over the prospect of integration when we asked, but neither did he sound particularly concerned. It is, he says, just one factor he considers in his strategic planning. Lim is president and CEO of 1st Valley Bank in Cagayan de Oro, Mindanao. Rural and family-owned, medium-sized but growing, profitable but not without pressures, 1st Valley works on the front line of bringing ordinary citizens into the global economy. Founded in 1956 by Sonny’s father, Rosario, as the Rural Bank of Kapatagan Valley, it was created to serve the rice and corn farmers of the north-central provinces of Mindanao, the Philippines’ second-largest and southernmost island.

A rice farmer himself, the elder Lim understood his clients’ needs. The bank grew – not stupendously, but steadily – and eventually merged with the Rural Bank of Sinacaban in 2005 to become 1st Valley. With 60 to 70 percent of the Philippines’ rural population lacking a bank account, says Lim, and only a mere 6 percent of business growth in small, provincial businesses funded by bank lending, 1st Valley’s mission and market is to reach these businesses and households with support and economic prosperity. Today, 37 branches serve more than 70,000 clients, making it one of the Philippines’ largest rural banks.

Fully 61 percent of 1st Valley clients use loans for agriculture – typically rice and corn, and now, increasingly, cacao. Two loan types are offered: those secured by land or salary stream, and those that are unsupervised (uncollateralized). Salary loans of up to 525,000 pesos ($11,200), made mainly to government employees and teachers, account for 2.4 billion pesos ($51 million), or almost half of 1st Valley’s portfolio. Microfinance loans of up to 300,000 pesos ($6,400) comprise a small share of the bank’s portfolio, but serve as an important test bed for all its credit products. Small and medium enterprise (SME) lending, from 300,000 to 5 million pesos ($6,400 to $106,000), accounts for 10 percent of the portfolio and is growing at 30 to 40 percent per year, with plans to ramp it up even faster.

National bank liberalization has already led commercial Philippine banks to acquire more rural and thrift banks, potentially increasing competition for 1st Valley. The big banks see money, Lim says, particularly in salary loans. Christian-Muslim antagonism and Communist insurgency – the latest attack by the New People’s Army blared from Cagayan de Oro headlines the day we arrived – add spice to his planning challenges. For now, he explains, 1st Valley will focus on what it does best: agricultural and SME lending, and microfinance.

Though national bank liberalization has led commercial Philippine banks to acquire more rural and thrift banks, potentially increasing competition for 1st Valley, it has also provided the bank with a unique advantage. A 2013 amendment to the Rural Banking Act allowed foreign investment in Philippine banks which, in turn, permitted a new company called Bridge, led by American Paul Kocourek and Englishman Gus Poston, to invest in 1st Valley. Kocourek and Poston, both with deep regional banking experience, founded Bridge in order to help build a strong network of provincial Philippine banks committed to social impact. Identifying rural finance as the “missing component of inclusive banking,” their aim is to provide critical capital for growth, but also assistance in product design, risk management and more.

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Discy Santiago, first-grade teacher and 1st Valley client, Iligan City Central School, Mindanao.

Bridge came to market in March of 2013 with $24 million in funding, provided by microfinance investment vehicles such as Bamboo Finance and national development banks such as the German DEG and Dutch FMO. (Full disclosure: Accion is also an investor and operating partner in Bridge.) 1st Valley was Bridge’s first investment, and remains its crown jewel. “The growth opportunities in [1st Valley’s] target markets are huge,” says Poston. “There are 1.3 million farms in the areas where 1st Valley operates, and the bank is only lending to 7,000 at the moment. To put it into perspective, Mindanao is about the size of Cambodia. There’s approximately $5 billion of microfinance lending in Cambodia. ‘Inclusive banking’ in Mindanao is smaller than a billion dollars.”

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One of Discy Santiago’s first-grade students.

The Bridge investment has added substantial heft to the bank’s foundation and prospects, although no one underestimates the magnitude of the task ahead. While Sonny Lim lists bank liberalization and the threat of ASEAN integration among his concerns, Poston throws in a few more challenges. “Typhoons, land holding questions, security issues … we face specific barriers to lending in the Philippines,” he says. “1st Valley’s challenge is to continually improve its product offering, service quality and risk-management methodology so that it can reach more farmers and microfinance clients.”

Magic Beans

Bridge’s imprint can be seen and felt particularly in product development, helping to create tools such as new loans for poultry farmers and micro-insurance. But perhaps the most important new product is 1st Valley’s cacao loan.

Eighty to 90 percent of the world’s cacao (the raw ingredient in chocolate, cocoa butter and many other popular products) is produced by small, family-run farms – farms that must be no more than 15 to 20 degrees in latitude from the equator. Cacao, says Lim, can be grown in only 36 countries in the world – but it thrives in the soil and climate of the islands’ palm-shaded small holdings, and is productive within 18 to 24 months. That makes the Philippines ideally placed to help address a global cacao shortage that some say will reach a million metric tons by 2020. Since 1670, cacao has been a cash crop in the Philippines. By the 1980s, national production had reached 40,000 metric tons. By 2013, however, land reform and diseases had conspired to whittle that down to some 8,000 tons.

In response, the Department of Agriculture flagged cacao as a High Value Crop – a banner program created to help address food security, poverty alleviation and sustainable growth. Through the Philippine Cacao Challenge, the country committed to producing 100,000 metric tons by 2020, and has included cacao as part of its National Greening Program, an initiative to reforest the country. Mindanao, already delivering 90 percent of the country’s crop, was identified as ground zero.

Cacao: Magic beans.

A 1st Valley cacao loan provides borrowers up to 75,000 pesos ($1,600) over seven years. The bulk of the loan is delivered up-front, with two years’ grace given as the crop becomes established, initial installments reduced, and full installments required only during the last four years, as the plants become fully productive. To help ensure success, the bank partnered with Philippine agribusiness company Kennemer Foods International, which created a complete agricultural value chain for the smallholder farmer. This included seedlings, fertilizer, pest control, agronomy assistance and training – training not only for the growers, but also for bank staff. Farmers who follow their protocols, says Kennemer, will see their yields quadruple.

The support is typical – and timely. Mindanao is eight months into a widespread drought, the result of a powerful El Niño that has shaped Philippines weather for a year. Despite lower growth rates as a result, however, Poston reports that clients’ first cacao plantings are already producing pods.

He and Lim are forthright about the work ahead for 1st Valley:  improved risk management, expansion into electronic channels, growth across all loan products and term deposit accounts. Expectations for microfinance and SME lending, in particular, are high – 7 million pesos ($150,000) per month for the microfinance portfolio, for example, or 80 percent growth year on year. And addressing delinquency, with the total outstanding balance of loans past due for more than 30 days currently at nearly 10 percent, is paramount.

There’s work for Bangko Sentral ng Pilipinas (BSP), too. “The central bank still has a lot of problems to solve, especially in the rural banking industry,” Lim says. While the number of rural banks has declined by a third in recent years, to around 650, he estimates that only 200 are profitable and healthy.

As for ASEAN integration, Poston evinces little concern. “We have to be realistic about the difference between rural banking and commercial banking,” he says. “1st Valley is targeting hard-to-reach rural clients and providing them with microfinance, SME and agricultural loans, which require totally different skill sets from other forms of banking. I don’t think there will be a major foreign competitor operating in rural Mindanao. Even the local banks are reluctant to expand in these areas.”

Road under Construction

To get a true feel for 1st Valley, one must leave Cagayan de Oro and get out to the country. For two days we made our way west along Mindanao’s northern coast road, stopping to visit branches and clients en route. We met Discy Santiago, a first-grade teacher at Iligan City Central School, who took out a salary loan to cover her sister’s medical expenses. In Lala, we met rice farmers such as Luz Hernando, whose supervised credit helps ensure that her 2.5-hectare tenant farm is as productive as possible. The loan addresses every phase of the production cycle, from fertilizer and seed through to a guaranteed buyer (1st Valley itself, if for any reason the farmer can’t sell their crops on the market – and at market price). “It’s like a family here,” Mimi Enad, the bank’s head of risk, told us.

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Luz Hernando, rice farmer and 1st Valley client, Lala, Mindanao.

The coast road itself is a work in progress. Pedestrians, motorbikes and cars wrangle and compete for space. Blind corners, high speeds, and games of “chicken” favor the nimble and strong of nerve. Cavernous potholes attest to the road’s importance; endless repaving projects emphasize the challenge. And every once in a while, for a brief second, comes a glimpse through the palms of the electric-blue Bohol Sea, like a travel poster advertising a reward for a job well done. Somewhere in there is a metaphor for 1st Valley.

The Philippines cast a long shadow in financial inclusion. To its credit go the earliest mobile money solutions, SmartMoney and GCash. The country perennially scores at the top of The Economist’s “Global Microscope” report, an annual assessment of enabling environments for financial inclusion. The BSP, among the most far-sighted, client-protection-friendly and highly regarded of central banks, keeps a sure hand on the levers of finance. It has always been a country to watch.

And as Kocourek and Poston intended from the start, perhaps the Philippines is just the right place to address rural finance, that missing component of inclusive banking.

Published in NextBillion, May 2016. 

Header image courtesy of Pixabay.


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